Lux's Peter Hebert on Smart Grid

This week my Lux Capital partner Peter Hébert who leads many of our energy VC investments weighs in with great insights from a recent interview on the “Smart Grid” which he says is getting smarter by the hour.

PLI: Lately, we've been hearing a lot about smart grid technology? What exactly is it?
PETER HÉBERT: "Smart grid" has definitely become the topic du jour in both Silicon Valley and Washington, DC. One of our portfolio companies Lux Research—which analyzes energy technologies on behalf of large corporations and hedge funds—defines the smart grid as a “two-way real-time network connecting distributed generation, distributed storage, and distributed intelligence to increase grid reliability and enable green technologies such as wind turbines and plug-in hybrid vehicles." Smart grid technologies will help modernize the electrical power grid to support increasing demand, more intermittent renewable energy as well as increase overall energy efficiency. This is a big deal—Lux Research expects the smart grid to grow from a $2.7 billion market today to $4.8 billion in 2013—that represents an 11.8% compound annual growth rate (CAGR).

PLI: Can you give an example of smart grid technology?
PETER HÉBERT: Sure. First it's valuable to take a step back and understand our current electrical power infrastructure. Today's power grid is a one-way transmission and distribution network that allows utilities and other generation companies to deliver power to residential, commercial and industrial customers. Much of our grid dates back to the days of Edison—more than 50% of the transformer assets are over 40 years old! The aging grid can't keep up with ever-increasing electricity demands. If the infrastructure fails during periods of peak demand, we see blackouts—like those that swept the Northeast in the summer of 2003 and knocked out New York City's electricity. Replacing or adding additional power lines is prohibitively expensive, so utilities are looking for alternative ways to deal with peak demand—particularly in the summer.

Smart grid technologies fall into three broad categories: advanced metering infrastructure (AMI), networking systems, and software. A smarter grid infrastructure can help integrate renewable generation sources (like wind and solar) and in the long run, smart grid technologies will help utilities expand to more customers (such as plug-in electric vehicle drivers). At Lux Capital, we've made investments in several technologies that power a smarter and more efficient grid. The smart grid will also enable both utilities and energy users to better understand and control power usage. Demand response systems can help mitigate blackouts despite old power lines, and connects distributed storage and generation to the grid. Real-time energy information and time-of-use pricing can help consumers make better decisions—for example running a load of laundry when electricity prices might be cheapest late at night.

PLI: Can you give us a brief history of the technology?
PETER HÉBERT: As I said earlier, smart-grid is not one technology, but rather the combination of a number of products and technologies in hardware, software and networking. Over the past few years, utilities and local governments have been aggressively building out smart-meter infrastructure. The first step to enabling a smarter grid is upgrading meters for enhanced data capabilities, including two-way meters that read electricity flow in both directions — from the utilities to the customers, and vice versa. Around 20 million smart meters are already installed worldwide and many more are on the way. Based on announced and likely installation programs (and assumption of meter costs), Lux Research forecasts that the smart meter hardware segment alone will be a $2 billion/year business in the next five years.

PLI: How committed is the federal government to deployment of the technology and what steps is it taking to promote it?
PETER HÉBERT: In short—very committed. There has been huge government support and financing driving the deployment of the smart grid. Power outages and power quality disruptions cost U.S. businesses roughly $100+ billion per year. The Energy Independence and Security Act of 2007 mandates the deployment of smart-grid technologies. The recent $787 billion economic stimulus package included $4.5 billion for R&D, pilot projects and federal matching funds for the Smart Grid Investment Program to modernize the electricity grid. It's not just in the U.S.—the European Union has also formally promoted smart-grid technologies.

PLI: Are there any states, local governments or other communities that are already successfully using a smart grid?
PETER HÉBERT: Many utilities, as well as local and regional governments, have designed programs to roll out smart meters to enable the shift. Lux Research identified 147 such programs planned in the next 10 years worldwide, which would outfit global power grids with over 90 million smart meters in 2013 — and reach roughly 150 million 10 years from now. As an example, last month Florida's state utility Florida Power & Light and several corporate partners announced a state-wide smart grid-initiative, anticipated to cost upwards of $700 million.

Other utilities that have already announced major smart grid initiatives include PG&E, Nevada Power, San Diego Gas & Electric, Southern Maryland Electric Cooperative, Southern California Edison, Tampa Electric, Tennessee Valley Authority, Ontario Power Authority, ISO New England, PJM Interconnection, Toronto Hydro and ENEL. As part of these announced installation programs, about $28 billion of investments (government and private) have already been committed.

PLI: What companies are considered the “key players" in smart grid technology?
PETER HÉBERT: Some of the major smart grid pure-plays include public companies like Comverge (COMV), Echelon (ELON), EnerNOC (ENOC) and Itron (ITRI), as well as venture-backed start-ups like Silver Spring Networks, GridPoint, Trilliant and eMeter. Technology giants like IBM (IBM), Honeywell (HON), GE (GE) and Cisco (CSCO) also have major initiatives underway.

The biggest differentiator among smart-grid companies today is not rooted in technology, as much as in their business strategies. Companies like EnerNOC are focused on grid reliability for utilities, while firms like Comverge are targeting commercial and industrial customers that are trying to reduce their energy consumption.

PLI: What are some of the obstacles to a successful deployment of smart grid technology?
PETER HÉBERT: There are a plethora of different technology approaches to upgrading the grid, but the principal obstacles to successful deployment are not technical. Some major obstacles include future decisions on tax incentives, decoupling, and time-of-use pricing. While one driver for this increase on the utility side is a desire to decrease the number of blackouts, the conservation aspect serves a headwind to adoption. Many generators are paid by the megawatt-hour produced, and thus don't have a direct incentive to conserve. In fact, Lux Research has heard from many sources (including the CEO of a major U.S. utility) that utilities are getting paid less due to demand response and smart metering.

The bottom line: Whether or not utilities ever believe energy conservation is in their best interest, in the near term their focus will be on reliability. In the long run, smart grid technologies will likely help utilities expand to more customers, such as drivers of electric cars. At a recent conference I attended, one large energy company CEO said that he predicted the electric car would be the air conditioner of the 21st century for utilities.

The VC & the Dead Horse

Before I share an exclusive video interview, I’ll share a great story of the VC and the dead horse. Caveat emptor with most startups being hocked out there as stallions, when they’re old mares at best and dead horses at worst.

A west coast VC is visiting an east coast friend in the Hamptons for the weekend. He drives by a farmer with a horse and offers him $1,000 for the horse. The farmer accepts and agrees to transport the horse to the VC out west. After a few days, the farmer calls the VC and says the horse has died but he can’t refund the money because he’s already spent it. The VC says: “Don’t worry. Deliver me the dead horse.” The farmer, shocked and confused, complies. A week later the farmer calls the VC, feeling terrible about the money and curious what the VC could possibly do with dead horse. The VC explains: “Don’t worry. I made $19,990 off your horse.” The farmer stunned asked, “How?!” The VC said, “I advertised a lottery for a horse. At $10 a ticket, I sold 2,000 tickets.” The farmer incredulous demanded, “But...but wasn’t the winner furious he won a dead horse?” The VC smiled, “Yep—and I gave him back his $10.”

And that’s how the VC made nearly 20x his money on a dead horse.

Meanwhile if you’re looking for a big idea and a horse and a jockey to bet on: Last week in Forbes studio I sat with the very intelligent partner of Shai Agassi and Head of Oil Independence Policies at Better Place, Mike Granoff. Watch our exclusive interview here and find out why electric cars are actually good for Arab population: http://video.forbes.com/fvn/clayton/electric-cars-vs-gm

Clever China Commodity Charge

Everyone looks to explain things away. China buying commodities? It must be growth, they say. Maybe decoupling is real. I say not. Yesterday's NY Times headline, "China Fills its Pantry With Global Commodities". Commentators cheered on China's consumption. If this is the consensus view, it’s likely to be wrong. This isn't consumption. It's investment. It's diversification. Away from the US Dollar.

We have a debt overh ang. The options are simple: pay your debt or don't. You can pay it in cash or kind. Pay it in cash, you're clear. Pay it in kind (collateral—whether a house or a stock), you may be 'cleared out'. Since most debtors can't pay, lenders must either take debtor's stuff by seizing and selling their collateral or take their stuff by converting their debt to equity. Rule of law and bankruptcy allows for orderly procedure of this last option, unless the rule of law is suspended by government to prevent riots and revolutions from the working class that elected the government. The US government isn't really willing to let the prices of stuff (collateral) fall. So the other option is to let the value of the stuff that the stuff is valued in (ie. dollars), fall. We devalue our houses or we devalue our dollars. We do the dollar-devaluing thing by printing more of them. Many, many, more of them. More supply, less value. This is inflation. When there is a lot of money going around, it will eventually find itself into the prices of some other stuff. This way, the pain gets spread to those holding lots of dollars—like say China.

China officials have already jawboned the US publicly about maintaining a strong dollar, about finding alternative stores of currency reserves. And THAT dear reader is my opinion of what China is doing. They are doing what Dave Swensen did when he arrived at Yale as a 31-year-old. He looked at Yale's holdings, saw 50% of their equities in US Stocks and the rest in US bonds and thought that no matter how diversified Yale was within those two asset classes, having a total of 90% in US marketable securities was definitely NOT diversified. He embarked on, and others later emulated, the now famous endowment model—diversifying into commodities, real estate, private equity and active managers—that has outperformed and compounded Yale's endowment to be the envy of institutional money managers.

China may be diversifying its reserves into hard assets. If inflation comes, the value of those assets, especially in dollars will rise. If hyperinflation comes, the value, especially in dollars will skyrocket.

Clever. And what you might expect from the academic pedigree that comprises their government officials. In the US ours are mostly lawyers and career politicians. In China, theirs are mostly engineers, geologists and mineralogists. Who's got the edge?

Click Here, To get access to the newly launched Forbes/Wolfe Emerging Tech Repcort (covering nanotech, cleantech, and all physical science breakthroughs)

Ex Tenebris Lux & Revealing Everspin

There’s a Latin phrase I like; Ex Tenebris Lux—from darkness, light. Well, there’s lot’s of activity buzzing here in spite of the economic malaise. Magen was acquired by PPD. Our newest portfolio company Luxtera, the leader in CMOS photonics (optics on chips) announced a deal with Freescale, from whom we also spun-out a breakthrough company in nanoscale memory, Everspin, which is revealed below.

Right now: there’s an alphabet soup of economic trajectories: V, W, L, square roots signs. The slants and their slopes are shaped by investor expectations. Of course fundamentals matter—just less than expectations of fundamentals. Like bending a spoon with your mind—and often as illusory—the collective psychology of markets bends the shape of expected future outcomes. Exuberance and optimism inflect expectations upward. Despondence and pessimism yank them downward. A sunny day with expansive landscapes and vista views makes investors happy, calm and confident. It’s like standing upon a ridge, clear skies as far as the eye can see, investors lengthen their horizons, lower their discount rates and take long-term view on assets. Exploration and risk-taking are the order of the day—life is good. But when an unexpected storm full of fury hails down, so does panic. Fueled by fear, investors run for cover turning sad, nervous and uncertain. Huddled in the herd, staring downward barely focused beyond their footing, time-horizons shorten, discount rates skyrocket. Forget the future, the here-and-now triumphs, survival is the order of the day.

But here we celebrate those inventing the future. And today I share an exclusive Forbes sit-down with CEO of one of my venture firm Lux Capital’s most exciting portfolio companies, Everspin.

Aurangzeb Khan is president and CEO of Freescale Semiconductor-spinoff Everspin Technologies [full disclosure: my venture firm Lux Capital is an equity investor]. Earlier, he co-founded Altius Solutions, Inc., where he served as president and CEO through its merger with Simplex Solutions, Inc. and contributing to a successful initial public offering (IPO) in May 2001. He then served as an executive vice president and general manager at Simplex through its acquisition by Cadence Design Systems [CDNS] in June 2002. Aurangzeb has also held several engineering and general management positions at Cirrus Logic [CRUS], Tandem Computers (now part of HP [HPQ]) and Fairchild [FCS]. He helped deliver several industry-first systems and SoCs to market, several of which received industry-leadership business and technical recognition and have achieved $200 million to more than $1 billion in annual revenues. Aurangzeb received a master's in electrical engineering and a master's degree in engineering management from Stanford University, and a double-major bachelor of science in electrical engineering and computer sciences and nuclear engineering from U.C. Berkeley. Aurangzeb holds eight patents in IC circuit design, has contributed to more than 90 technical and business papers and has received coverage in more than 100 published articles.

Let’s start with Everspin. You are a Silicon Valley veteran, what attracted you to join as CEO of the company?
Everspin pioneered the integration of nanomagnetics with semiconductor devices. Many companies have tried to build this kind of memory (MRAM), but the folks at Everspin were the first to pull it off. I had been following the team’s work for a while, and what I particularly liked about Everspin’s approach, besides the leading-edge innovation, was that they did everything with commercialization in mind—with a view of producing something that could be manufactured in high volume with high yields. So that was a big part of what attracted me to the company.

Also, over the last few years I’ve done a lot of work in system-on-chip design, including work with Sony [SNE] for the PS2, as well as other consumer, networking, and telecommunications devices. I realized that in all of these devices, memory plays a critical role in the performance of the systems, so creating a breakthrough new memory could make a dramatic impact. I saw Everspin facing an enormous market opportunity, and that excited me.

By joining the company, what were you hoping to do?
I wanted to help the company grow and scale, bringing a bit of my own experience in both founding and building new companies as well as contributing at large organizations that brought new, industry-leading products to the market.

Let’s back up for the readers - define MRAM and why it’s important.
MRAM is a type of computer memory that consists of a nanomagnetic tunnel junction device and a single transistor to read and record data. It’s similar to other types of memory, except for the key difference that it’s non-volatile. That is, if you take the power away from this device, it doesn’t lose its memory, and that’s because the information is stored as a magnetic state, not as an electric charge. Physically, it is a very simple design, so there is a lot of headroom to scale the technology forwards.

What kinds of products do you envision MRAM being used for?
From the baseline technology we are building, there are three classes of products that emerge. The first are standalone memory chips. These are chips that you or I could go buy to install into our systems. The second is memory for system-on-chip applications, where Everspin’s memory could be integrated onto one piece of silicon with the other components necessary for a given system. The third application is sensors, and it comes from the fact that our devices are actually very sensitive magnetic sensors, relevant for consumer, automotive and other applications where high sensitivity is important. So those are the three markets we are able to address.

What are some of the early applications where Everspin MRAM is being used today?
In one application, Siemens’ [SI] Industry Automation division—a customer of ours for two years—is placing our chips into human-machine interfaces and programmable logic controls for industrial automation machines. In these types of applications, non-volatility is important. In the past, people would try to make a form of non-volatile memory by connecting a static, volatile memory chip to a battery. That way, if the power went away, the battery would have enough charge to write the data from the memory to some other more permanent location. We have heard from our customers that these types of systems are unreliable and often malfunction, whereas our memory is intrinsically non-volatile. Just recently, we issued a press release announcing that Siemens has shipped over 100,000 systems with our memory into the field without a single failure. They assessed our chips as having perfect quality and reliability, an accomplishment we are very happy about.

Another customer of ours is Emerson [EMR], a global leader in electric power support. Yet another customer uses our chips in casino gaming systems to keep track of user data, configuration settings, and transaction data.
We are also getting a number of design wins in avionics, and in one example the Japanese space agency is using an MRAM chip in a satellite launched into orbit early this year to measure carbon dioxide levels in the atmosphere.

When you think about the future of MRAM, what do you think of as the greatest market opportunity?
I think storage is a very good opportunity for us. In areas where mission-critical information needs to be kept available and reliably stored with integrity, our solution is excellent. From the consumer perspective, imagine being able to turn a computer or device off and on instantly! MRAM gives you that ability because when you power the device off, it retains all of the information, even if the battery life runs out.

I think instant-on computers would be an instant hit with the public. How far away are we from seeing that kind of capability?
Well our density today is probably inadequate to serve as the boot up for a full operating system, but if you look at our roadmap, it’s conceivable that in the next several years we will have a meaningful level of density where at least part of that function can be implemented.
Today, for example, people are already using our memory in devices like studio cameras to maintain configuration settings for fast content switching.

Everspin itself was a spinout of Freescale Semiconductor. Tell me about the relationship with Freescale and your plans to speed up MRAM adoption as an independent company now.
Freescale is an investor in Everspin - it has a stake in the venture and believes in the technology, but we are an independent company managing our own destiny. Today, we are essentially a tenant of Freescale, so if you came to visit, you’d find me sitting in a facility that is part of the Freescale campus. Everspin has its own nanomagnetic fabrication facility, and that fab resides in a clean room space built up by Freescale.

After spinning out from Freescale, a lot of our work over the last year has been focused on the sales and marketing aspects of our business. We now have a global network of representatives, distributors and direct sales staff to uncover and serve the new market opportunities that I mentioned. Once folks become aware of where MRAM technology is today and how far it has come into its production history, a lot of opportunities open up because it gives designers a flexibility that they didn’t have before. Our team has also been very busy working on the technology and product development aspects of the business, and now we have 50 different part numbers in our portfolio of products. We have continued to expand the product, with new kinds of interfaces and new kinds of density footprints. Later this year we will introduce both a serial peripheral interface and a 16Mb design that will further expand our lead in this market.

You are approaching the one-year mark of Everspin being an independent company. What would you say is the biggest accomplishment to-date?
Considering that we are going through one of the most severe economic challenges in the last 25 years, I am just delighted with the level of market and customer traction that we are seeing. I think that in itself is a huge accomplishment, and the Siemens zero-failure news that I shared earlier underscores an incredible amount of hard work by the whole team to reach this milestone of being a demonstrably reliable innovator and business partner.

What other things should people be looking for over the next year from Everspin?
We are actively developing another kind of MRAM technology that several other folks are working on, called spin torque (ST-MRAM). This team has been working on spin torque since the very early days of MRAM, and we will continue to develop that technology and integrate it into our roadmap at the right time.

Geographically, are you seeing increasing patterns of demand or competition in certain parts of the world that have surprised you?

We’re not seeing much competition in the MRAM space, because there is no other supplier with comparable capability in the market today. In terms of demand, we are seeing good growth in Europe and Asia and we are in the early stages of getting wins in Japan at a number of accounts. We are seeing a lot of interest from the major multinationals who will try us on a first product, and after they have had some experience with us and see how well the product works, we are seeing customers expand the use of our chips into other products in the same business units, and subsequently giving us introductions to other business units within those organizations.

When you think a few years hence, what do you hope everybody will look at Everspin and say?
Our goal is to bring breakthrough products to the market in a way that shows that we are not only a leading innovator, but a reliable business partner as well. I think those two aspects together are very powerful - the combination of bringing truly industry-first technology to market and doing in it in such a way that companies can depend on us to be there with the right product when they need it is pretty special. That’s a big part of the Everspin brand: agile, responsive, and customer focused so as they are successful, we have a chance to succeed as well.

Who is your favorite author of all time?
Growing up I read a lot of Bertrand Russell. I like the fact that he was very inquisitive and also an iconoclast – he didn’t just take the conventional wisdom as received knowledge, and I guess I aspire to be a little bit like that.